A title loan refers to a type of secured loan in which the borrower may use the title to their property as collateral. Vehicle titles are the most common collateral used in a title loan. The borrower must allow the lender to place a lien on the vehicle’s title.
Additionally, they must temporarily surrender the hard copy of the title to the lender in exchange for the loan amount. The borrower will get the title back once the loan amounts have been paid off in full. Title loans are sometimes also referred to as auto title loans, or pink slip loans.
Should a borrower be unable to make good on their payments, the lender may possess the borrower’s vehicle and sell it in order to recover payments for the debt.
Title loans are appealing because you can receive a large amount of money just by turning over something you already own. Further, you may receive a title loan regardless of your credit score. Generally, the lender will not check the borrower’s credit history.
This is an ideal situation for those who may need a large sum of money quickly and have limited options, or are unable to obtain other kinds of loans. Title loans are a quick way to cover an emergency or get caught up on everyday costs.
However, title loans tend to have more cons than pros, some of which include:
- Interest Rates: The interest rates associated with title loans are relatively high and accumulate quickly. Typical title loans have an APR (annual percentage rate) of three hundred percent. This means that a title loan would cost you three times the amount you originally borrowed, just in fees and interest.
- A standard title loan lasts one month with a twenty five percent monthly interest rate. Many people cannot afford that, so they roll the loan over each month, and find themselves owing the three hundred percent. Lenders claim that these exorbitant interest rates are a necessary protection against default, as title loan borrowers are often times already experiencing financial hardships;
- Banned in Several States: Title loans are banned in several states (as many as thirty, according to some sources) because of their short terms, lump sum repayments, and the aforementioned high APR.
- Many states see title loan lenders as predatory, and the states that do allow for it do not tend to strictly regulate them. Title loans are often viewed as a consumer safety issue; and
- Misleading Name: Sometimes, a borrower thinks they are taking out a title loan, but are actually becoming involved with loans that are even less regulated than title loans.
- These loans are often called consumer installment loans, or consumer finance loans, and are alarming due to the fact that they might be structured to last considerably longer than a typical title loan, with a potential for unlimited interest. By offering these loans under a different statute, lenders are able to sidestep state lending regulations.
As previously mentioned, title loans work by the lender being granted a lien on your vehicle if you do not repay what you borrowed. One in five borrowers lose their vehicles to these lenders. This is obviously a substantial con when looking at the benefits vs. the risks of a title loan.
As previously discussed, title loans are illegal in many states. They are illegal because of their predatory nature, targeting of low income individuals, and from the endless cycle of excessive debt the loans subject the individuals to. Additionally, the advertisements for title loans are often highly misleading.
Title loans are legal in Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utan, Virginia, and Wisconsin. Other states allow title loans because of a loophole in their laws.
For example, in California, the interest rate on title loans is capped for loans up to $2,500, so lenders typically require a minimum loan of $2,500. In South Carolina, the same loophole allows lenders to set a minimum loan amount of $600; this allows the lenders to avoid laws that cap the interest for lower amount loans.
Several organizations, including the Consumer Federation of America, note that these loans are considered over secured and predatory, making them highly detrimental to the financial welfare and security of those they are targeting.
They point out that state and federal governments seem more interested in legislation that protects lenders and wealthy consumers, than legislation that protects the poor from predatory lending practices.
Generally, title loan disputes involve some sort of breach of contract, or a default on payments. An example could be a borrower contesting the lender’s right to repossess on the vehicle’s title. Some situations might allow for renegotiating the terms of the contract, such as loan modification. Other legal disputes could include loan fraud, identity theft, and financial law violations.
Class action lawsuits are a common solution to such disputes. A knowledgeable and qualified real estate attorney may be necessary in title loan disputes, as they are often serious and could include criminal consequences, as well as civil law issues. The attorney will educate you on your state’s laws, your rights and options, and will represent you in court if necessary.